San Francisco Mayor Ed Lee (second from right) listens to John Funghi (left), SFMTA project manager for Central Subway, during a briefing on the progress of the Central Subway in San Francisco, Calif., on Friday, October 14, 2011.

San Francisco has received a key approval from federal officials to move forward on its 1.7-mile Central Subway, Mayor Ed Lee said Wednesday.

In Washington for the U.S. Conference of Mayors annual meeting, where he met with Transportation Secretary Ray LaHood, Lee said the city has received a "letter of non prejudice" from the Department of Transportation that will allow the city to proceed with one of the largest phases of the $1.6 billion subway - to dig a tunnel under Stockton and Fourth streets, from the downtown Caltrain station to Chinatown.

Lee said the letter is "a good sign that the final grant agreement is on its way."

The city has applied for a nearly $1 billion full-funding grant from the Federal Transit Administration that would provide the bulk of the funds for the project. Officials said they hope to secure the grant agreement, which is an actual commitment of funding, within the next several months.

The Central Subway would extend the T-Third line from the Caltrain station at Fourth and King streets to Chinatown, creating a north-south link between the city's core and SoMa and Mission Bay.

Drew Hammill, a spokesman for House Minority Leader Nancy Pelosi, D-San Francisco, said Pelosi met with Lee and "shared excitement" over the letter, which will allow for the "Central Subway's work of creating jobs, improving transit and relieving congestion in one of the most crowded corridors in the nation."

Ed Reiskin, executive director of the San Francisco Municipal Transportation Agency, said the letter will allow the agency to build a $50 million "launch box," which he said means digging a big hole on Fourth Street, south of Market, in which to lower the tunnel-boring machine.

"It's a vote of confidence with teeth," Reiskin said, part of a step-by-step administrative process authorizing the city to spend money in anticipation of getting the final funding agreement. The administration would not provide such a letter unless it wanted the city to proceed, he said.

If the final funding agreement is approved as expected, it would go to Congress to sit for 60 days before taking effect. Reiskin said such an agreement is deemed to be approved, saying it would require an act of Congress to stop it from taking effect. Once that agreement is secured, he said the main issue is not whether Congress will fund the project, but the pace at which it doles out the money.

Lee has been a strong supporter of the subway, which became an issue in his election race last fall. The estimated cost of the project has more than doubled from estimates of $650 million in 2003. A civil grand jury report last summer concluded that the project should be scrapped because it would strain the struggling Muni system and is poorly designed.

The total federal commitment would be $983 million; the state has committed $471 million and San Francisco voters approved Proposition K in 2003 to levy a half-cent sales tax to cover $123 million. The subway's estimated opening date is 2019.